Question

You manage a hedge fund with $300 million in assets. your fee structure provides for a 1% annual management fee with a 20% incentive on returns over a 12% benchmark. if the fund value, beforefees, is $345 million at the end of the year, what is the net return to the investors?

Answer 1

(all figures are in $ mil)

Amount earned on investment = 345-300 = 45

Less: Annual management fee = 300*.01= 3

Less: Incentive fee (45 -3- 300*.12).2 = 1.2

Net Return to the investor= 40.8

Alternative solution:

Amount earned on investment = 345-300 = 45

Less: Annual management fee = 300*.01= 3

Less: Incentive fee (45 -3).2 = 12.6

Net Return to the investor= 29.4

This depends upon the agreement whether benchmark return is considered for calculating incentive fee.